No. of Recommendations: 3
A few days ago Berkfan wrote:
"
Price to Book 12/31/2007 1.82x
Book value was 78,008- Market price was 141,600- price to book 1.82x
Price/Book now is 1.67x
Not saying that we are heading into a crisis of that magnitude, but Berkshire was a flight to safety
"
If we do get a more serious stock market swoon, as the high prices of large cap growth come back to earth, a flight to safety boosting the price of BRK is a realistic outcome. That's probably already been happening, to some extent, helped along by an excellent earnings report.
Today BRK-A was 783,684.00, and book value was $451,507.17, which also the peak book value to date. So price to book (and peak book) is 1.74. Getting up there.
According to some stats Jim posted before, that's in the heights yielding negative one year return, in the past, ball-park negative 6% or 7% by my interpolation.
https://www.shrewdm.com/MB?pid=393116117"
Average one year forward REAL returns, based on ratio of price to peak-to-date book per share on purchase date.
Ending dates smoothed a bit.
First column is the average price-to-peak-book in that bucket. Each bucket is 1/20th of the observation start dates.
Second column is the average real one year return starting with a P/peakB in that bucket.
Third column is my smoothing of that data.
(I did a linear fit, and a cubic fit, and averaged those two results)
P/Peak Obser Model
1.075 34.6% 30.1%
1.165 22.2% 20.6%
1.204 19.1% 17.5%
1.250 15.4% 14.5%
1.295 10.5% 12.1%
1.323 4.6% 10.8%
1.343 5.5% 10.0%
1.359 9.7% 9.4%
1.376 8.5% 8.8%
1.392 5.5% 8.2%
1.412 4.5% 7.6%
1.438 5.7% 6.9%
1.461 6.8% 6.2%
1.483 5.3% 5.6%
1.509 7.7% 4.9%
1.537 8.1% 4.0%
1.579 3.5% 2.7%
1.638 4.0% 0.4%
1.693 -2.2% -2.4%
1.808 -12.0% -10.9%
"
Jim also cautioned:
"
One health warning from that exercise:
(other than the obvious one that the future may not resemble the past all that closely)
The table is created from observations of what returns were seen in the past after particular valuation multiples. However, in the past, we saw a lot of situations that above-average valuation multiples were followed by quite low ones within a year or two. Thus, a model based on those observations will come to EXPECT an overshoot to the downside in valuation levels, meaning a quite low one- or two-year price return. Maybe that's pretty typical--after all, valuations have to be below average around half the time--but one would not want to plan one's portfolio on the assumption of an overshoot. It might be more prudent to expect the future to be typical, since there is no way to know if a given future date will be above or below average.
A more "conservative" approach to guessing what happened next would be simply to assume that valuation are average at some point in the future (say, 1.4 times book), and observable value per share grows on trend (say, inflation + 7-8%/year). Picking figures for those two inputs will tell you a fairly plausible (real) price for any future date.
"
https://www.shrewdm.com/MB?pid=762490230 